KPMG urges changes to cut Australia’s structural deficit

Changes urged to cut Australia’s structural deficit

KPMG Australia today unveiled a series of proposals aimed at reducing the country’s structural deficit in the medium-term. The report contains over 30 recommendations focusing on the health, superannuation, welfare and education sectors which could improve the budget position on a long term basis by around $12 billion annually.

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Peter Nash, KPMG Chairman said: “It has been hard to gain popular traction for talking about the structural deficit because Australia has been prosperous and enjoyed 25 consecutive years of uninterrupted growth. But that deficit is growing, and what we have been doing for almost a decade is simply not sustainable. The cost of failing to maintain a sustainable fiscal position will be a declining credit rating and higher interest payments on our debts. This legacy will be passed onto future generations unless we take steps to maintain our competitive position. An early fix is the least costly option.”

“Importantly, there are different ways to address our deficit, including extra investment, not just spending cuts. While the term ‘structural deficit’ seems to have become part of the lexicon of arguments for smaller government, we set out a range of measures in this paper some of which include a bigger role for governments at federal and state level.”

Solving the Structural Deficit extends the conversation from KPMG’s position on tax reform, published in July last year. KPMG sets out ten principles for fixing the problem, ranging from efficiency of delivery to managing community expectations of what government can and should do.

Grant Wardell-Johnson, KPMG Head of KPMG’s Australian Tax Centre, said: “A key issue is the need for greater clarity of purpose surrounding public expenditure and tax concessions, which should both be evaluated against, and efficient in meeting that purpose. We are not clever in estimating the costs and benefit of a project for the purposes of our government accounts. We tend to analyse only the clearly known costs over the period of the forward estimates, which does not always give a true picture.”

Structural deficit – economic forecast

KPMG Economics estimates that on current policy settings, the budget remains in actual and structural deficit at least until 2030.

KPMG Chief Economist, Brendan Rynne said: “In our analysis, the structural budget balance initially drops from around 3% in the late 2010’s to 2.2% by the mid 2020’s; however it remains sticky at about mid-2%’s of nominal GDP from 2025 to 2030. The context is that over the past fifteen years real GDP growth on a component basis (labour productivity x total hours worked) averaged 1.6% per annum. But over the forecast period – the next fifteen years - this falls to 1.3% per annum. The driver of this fall is a consistently higher unemployment rate, and a continuing downward trend in the number of hours worked per employee.

“In the absence of any meaningful tax reform, we don’t see government tax receipts covering government payments at any stage over the next fifteen years - this gap ranges from between around 0.5% of GDP at its best, to around 2.2% of GDP at its worst. The budget remains in a structurally deficit position throughout the whole forecast period.

“We are simply generating less tax revenue per person in the economy now. To resolve this, we can either tax more or spend less - or the better option is to do both. To reverse this decline we need to grow the economy in real terms at a stronger pace than what is currently expected in the forward estimates. Unless this occurs, Australia is destined to maintain actual and structural budget deficits well into the future, worsening our debt position as a consequence.”

Health

Health is a key area, given that spend on healthcare now tops $150 billion, or 10% of GDP. With costs rising, fragmentation in the system leading to silos, and growing debate over areas such as overservicing and end-of-life care KPMG believes a full root and branch inquiry into the health system, including related expenditures, should be undertaken once a decade.

Evan Rawstron, KPMG NSW Health Leader said: “Greater competition can play a transformative role in improving quality, efficiency and access, but it needs to be introduced and managed in a coherent way. This should not mean treating patients as market agents, rather moving to a position where individuals are treated as genuine partners in the joint management of their own health.”

KPMG’s recommendations on health include:

Change the Medical Benefits Schedule for the primary care sector to provide for integrated care for chronic diseases

Reduce over-servicing for common procedures by reference to international standards and regional variations based on hospital admissions and complications

Make the use of prescription medicines more efficient by driving evidence-based use to reduce variance, which will enable negotiation of cheaper prices and greater tendering for generics

Bundle procurement of services such as medical imaging, radiation oncology, and dialysis to provide diversity and through additional competition, reduce costs

Strengthen the implementation of Advanced Care Planning to improve end-of-life experience and elimination of needless treatment

Cut private health insurance rebate by 6% initially, then 12%.

Superannuation

Paul Howes, KPMG Head of Wealth Management Advisory, said: “One of the areas we look at in detail is superannuation – and the tax concessions in this space are a classic example of how we have gone astray, principally because their purpose was never defined. We now have no choice but to reel them back in.”

KPMG’s recommendations on super include:

Reducing annual income threshold at which a 15% tax rate applies for concessional super contributions from $300,000 to a lower threshold

Reinstating the Low Income Super Contribution for those earning below $37,000

A requirement to divest excessive fund balances with a transitional period of 4 years to achieve this balance

Reduce the CGT discount from one-third to one-quarter

Introduce a rule which crystallises unrealised gains at conversion from accumulation to pension phase

Damian Ryan, Tax Partner, Superannuation, added: “Equity must be the cornerstone of any good tax system and so it is when addressing our structural deficit. We believe our super tax proposals, together with changes to the age pension, will raise nearly $5 billion towards the deficit and meet the test of fairness.”

Welfare

On welfare, while the KPMG paper has many proposals for reducing government expenditure, there are some areas where increased investment will pay dividends in the long-run. One recommendation is to raise Newstart from $250 to $300 per week.

Brendan Rynne, KPMG Chief Economist, said: “The low level of Newstart is actually forming a barrier to employment, as it is insufficient to allow unemployed people to actively conduct job search. This is an example of how some cuts to welfare can be counterproductive, both socially and in terms of cutting the long-term deficit.”

Other KPMG recommendations on welfare include:

Reviewing rates, income free areas, tapers and income definitions to create greater consistency and support benefits of work

Piloting an “investment approach” targeting clients at risk of significant long-term dependence on income support with intensive early intervention;

Simplifying family payments to be paid on a per child basis with a cut off based on primary carer income of twice average weekly earnings

Child care payments for all forms of child care provided it is paid to someone who treats it as assessable income. 100% for lower cost care down to 75% for higher cost care.

Grant Wardell-Johnson said: “In our tax reform paper last year, KPMG proposed conflating the current Family Tax Benefit A and B, the Child Care Benefit and the Child Care Rebate into two transfer payments. The tax and transfer systems do not currently interact smoothly enough and female participation in the economy - a key driver of productivity – is damaged. Overhauling the taxation of childcare is crucial both for equity reasons and long-term benefit to the economy and helping reduce the deficit.”